Big Deal, Short Leash

WASHINGTON — Federal Communications Commission chairman Tom Wheeler and the Department of Justice on May 6 green-lighted one of the largest broadband mergers in history, but not without exacting strict over-the-top programming access and buildout-related conditions.

Why did the proposed meld between Charter Communications, Time Warner Cable, and Bright House Networks — a deal that was close to being done a month before — stretch on? The delay had to do with getting those conditions lined up, and the three big ones — data caps, interconnection and over-the-top access to programming — will last for seven years. (The full FCC still had yet to vote on the merger at press time.)

Comcast also had to agree to seven-year conditions in its 2011 deal in which it wrested control of content giant NBCUniversal from General Electric, so there is precedent for the lengthy time frame, but Charter was hoping for three years.

New Charter, which will have 17.3 million video customers, 19.5 million high-speed Internet subscribers and 9.5 million voice customers when the dust settles on the $78.7 billion deal — will not be able to employ usage- based pricing or the broadband data caps now being tested by others.

The post-merger MSO will keep the Charter name (sans Communications) and pass about 48 million homes; operate in nine of the top 25 DMAs, including the two largest, New York and Los Angeles; and have a combined 24 million customer relationships.

Charter had already pointed out that usage-based pricing and caps are not part of its current business model — but now that choice will be an enforceable deal condition for seven years. The company has a chance after five years to petition the FCC to remove that and the other seven-year hitches.

But given that Wheeler labeled those business plans “unfair barriers to video competition” in announcing the merger conditions, the rest of the industry may not have those options for long, either, though Wheeler signaled the conditions were deal-specific.

One former top FCC official said that, to him, it sounded like regulating by deal condition. “How are you going to allow these other data cap deals if you are going to say they are unfair?” he asked.

And no matter what the U.S. District Court of Appeals for the D.C. Circuit does with the FCC’s Open Internet rules — a decision on that challenge could come down at any time — New Charter, which would be the nation’s second-largest broadband provider and third-largest MVPD, will have to abide by all of them, including the general-conduct standard that allows the FCC to look at a range of prospective practices.

That was another promise Charter had already made as it tried to win favor with government regulators.

But while the deal could hamstring Charter vis-a-vis the competition in some areas, it allows the company to scale up like other industry players, such as AT&T, which merged with satellite-TV provider DirecTV last year, and Comcast-NBCUniversal.

Clearly, Charter saw those conditions as the price of getting that scale under an FCC and Justice Department that were focused on broadband — and that were being lobbied by some groups to block the deal entirely.

“Look, whatever they are, they are terms and conditions the company has agreed to as part of its exchange of value in an effort to get the merger approved,” National Cable & Telecommunications Association president Michael Powell said of the proposal.

Powell added that he had “a longstanding criticism of the way merger approvals are done and whether they are truly efforts to prevent competitive harm or efforts to regulate substantially more than jurisdictional authority allows,” but said he would wait to see the details.

One former top FCC official called the two MSOs the perfect pair. “Time Warner Cable desperately wanted to get out of the business, and Charter had to get this merger through in order to compete,” the official said.

Ultimately, Wheeler apparently saw the opportunity to put broadband-related conditions on the No. 2 broadband provider in the country as worth the pushback he would get from those who think any further industry consolidation is too much.

He said last week his vote to approve was based on imposing conditions “that will ensure a competitive video marketplace [with an emphasis on over-the-top video] and increased broadband deployment.”

Another former FCC official speaking not for attribution said the deal definitely hurt Charter competitively.

“Looking at all the things the deal is doing, it looks a lot like industrial planning, as opposed to otherwise,” the official said.

The source took issue with the FCC saying, in the context of a transaction, that it didn’t like usage-based billing or interconnection “because [it] wants to favor OVDs.” The official said that didn’t make sense when Netflix had 40% of the Web traffic, adding: “[Wheeler] has developed some very 1990s solutions to some 1980s problems.”

Piling on the broadband conditions, even if Charter committed to many of them voluntarily, appeared to work in terms of assuaging critics, given their relatively muted tone last week.

Deal opponents generally praised the many conditions, suggesting they helped take some of the sting out of another big merger, though Free Press president Craig Aaron said Wheeler had tarnished his legacy by approving the deal.

The Justice Department had filed suit against the merger on antitrust grounds, saying that, without conditions, the combined company would have “a greater ability and incentive to secure restrictions on programmers that limit or foreclose OVD access to important content.” Then, it filed a settlement in federal court with the repairs that would make the deal OK, which is Justice’s standard procedure in approving a deal with conditions.

Wheeler circulated a conditioned approval proposal to the other commissioners. They had yet to vote on it at press time, but the chairman would not have circulated it without the votes to approve it, albeit likely with one or both agency Republicans citing their unhappiness with the number of conditions either in partial dissents or statements.

The DOJ and Wheeler announced their conditional approval on the same day, and both signaled through those conditions that the broadband side of the deal was key.

The FCC conditions — in addition to disallowing usage-based billing or data caps, and requiring adherence to net-neutrality rules — included mandatory high-speed broadband buildouts to 2 million more customers and a ban on interconnection fees, including to any online video providers like Netflix (another practice Wheeler branded an unfair barrier to video competition).

The DOJ also levied a seven-year condition that Charter cannot strike or enforce a contract that limits a programmer’s ability to offer that programming to an OTT competitor.

There is also a low-income, low-cost broadband initiative required for at least four years. Again, Charter had already pledged such an effort, so that is not a heavy lift.

Charter won’t be able to close the deal until at least May 12, when the California Public Utilities Commission is expected to vote on approving the merger. An administrative law judge has already recommended the deal be approved, with statespecific conditions. It is the last state approval hurdle for the deal to clear.